Crowdfunding - The latest way to get your project funded

Programmers, manufacturers and developers who want to realise their creative vision without signing onerous contracts or relinquishing rights to their intellectual property now have an alternative to venture capitalists. Crowdfunding - the collection of funds directly from a target audience - has taken off. Small donations are adding up to hundreds of millions of dollars, many of them channeled through a service called Kickstarter.

Programmers, manufacturers and developers who want to realise their creative vision without signing onerous contracts or relinquishing rights to their intellectual property now have an alternative to venture capitalists. Crowdfunding - the collection of funds directly from a target audience - has taken off. Small donations are adding up to hundreds of millions of dollars, many of them channeled through a service called Kickstarter.

Launched in 2008, Kickstarter is one of the leading crowdfunding services. According to an interview in online publication Talking Points Memo with Yancey Strickler, one of Kickstarter's founders, the company's currently on track to award more money in 2012 than the entire fiscal year 2012 budget for the National Endowment for the Arts.

Of course, Kickstarter isn't the only option. Besides other general crowdfunding sites such as Indiegogo, there are also focused alternatives, such as Feed the Muse for musicians, 8-Bit Funding for indie games and Sponsume for United Kingdom creators.

Kickstarter works this way: Artists create a project in one of 13 categories - from music and photography to publishing and technology - with a minimum funding goal and a funding duration of at least 30 days. Backers select a pledge amount - from $1 to $10,000 - and if the goal is met before the deadline, Kickstarter takes a 5% cut and, through Amazon Payments (which also charges a percentage of the transaction), processes all pledges and awards it to the designer (which is taxable as income).

If the goal is not met, then no pledges are collected and the artist gets nothing.

But just because you've met your goal, it doesn't mean you stop collecting pledges. Fundraising continues until the deadline date, even if the goal is met beforehand, resulting in some wildly successful projects. An early example was Diaspora, in which four New York University students asked for $10,000 to create open-source social media software. Their project resonated with those looking for an alternative to Facebook, and the students ultimately raised $200,000 via Kickstarter.

Why do they give?

Key to the Kickstarter model are rewards, chosen by the project creator and given to backers in tiers based on their pledge amount. Rewards can be anything from a bumper sticker to a preorder of the backed product to a producer credit. Kickstarter now requires project creators to provide an estimated date of delivery for rewards, but there is otherwise no oversight from Kickstarter to ensure funds are used appropriately or that rewards are distributed.

"The projects that always seem to make the money are the ones in which a person gets a product at the end," says Jason Scott, a historian who has funded four documentaries on Kickstarter after years of building a name for himself as an online archivist with projects such as Textfiles.com. He adds that projects that have progressed to the prototype stage and just need money for the final editing, manufacture or distribution are more successful than those that exist only as unproven concepts. In the case of Scott's first documentary, all filming had been completed prior to his launching a Kickstarter project; backers received DVDs when they were released.

Kevin Savetz, owner of Savetz Publishing and creator of online services including FaxZero, has backed 22 projects on Kickstarter, from an iPhone camera lens to computer history books; he found out about these projects primarily through social media. "I love the ability to help people create things that are interesting to me, but so niche-y that they might not have been able to be created without something like Kickstarter," he says. Savetz adds that the rewards offered on Kickstarter aren't as important as seeing the artist's vision realized. "On rare occasions, if the project is created by someone I already know and admire, I'll throw big bucks at it to help the project succeed," he says.

Highs and lows

The Kickstarter model has helped make many projects a success - and it has produced a few blockbusters. In April, Kickstarter hit a new milestone with its most funded project ever: Pebble, a customizable Bluetooth wristwatch with an e-paper display and its own app store. Within just six days of launching, the Pebble project raised $5 million more than the requested funding of $100,000. Pledges of at least $99 earn their own Pebble when it ships in September, with nine people thus far having pledged at the $10,000 tier in return for a hundred Pebbles.

Not every project enjoys such outrageous success - and some have fallen by the wayside. Charles Mangin developed a prototype of his PressurePen, a pressure-sensitive stylus for iOS and Android tablets. He began seeking traditional funding six months ago and received early interest from a potential traditional investor, but the development cycles didn't match up. "[The investor] was expecting the prototype to be more retail-ready," says Mangin, "something he could just take to his manufacturing partners as-is and say, 'Make ten thousand of these.'"

When that plan fell through, Mangin turned to Kickstarter. However, he had to compete with other pressure-sensitive stylus pens such as jaja and Jot. Coming late to the party, the PressurePen raised only 6% of its $60,000 goal. Mangin now wishes he had pursued crowdfunding from the start. "If I had gone straight to Kickstarter, mine would've been the first project like it on Kickstarter," he says.

Now, Mangin's fallback plan is to sell self-assembly kits of the beta model of the pen, with both the hardware schematics and software source code available as open source. "Plan B is a much longer, more arduous route," says Mangin.

Other entrepreneurs have had to adjust their expectations to obtain their crowdfunding goals. NKMOS Design Technology's Nik Conomos sought funding for an iPhone car mount. When he realized the project's original goal of $65,000 would not be met, he canceled the project and restructured it with a more reasonable goal of $10,000, which has been successfully raised.

"The original funding goal was to cover all of the tooling and manufacturing costs," says Conomos. Covering those expenses "was something we were willing to do ourselves, but of course it's just much riskier."

Getting the word out

Innovators with a vision could seek funding on their own sites without relying on the Kickstarter engine, but doing so puts more onus on them and limits their reach. "Kickstarter is giving you a platform and destination for an audience," says David Greelish, who got funding for a computer history book through Kickstarter.

By using Kickstarter, project creators can focus on promotion rather than building their own crowdfunding mechanism. Kickstarter does help: It gives potential investors a way to browse through projects they might be interested in, and projects are occasionally featured on the site's email list and Facebook page. "They provide a really nice backend for interacting with your investors," says Jason Scott, ticking off the ability to post backer-only updates, export backer data for later use and more.

Don't forget the IRS

Both Kickstarter and its payment gateway, Amazon.com, take a cut of funds processed through the crowdfunding site. The project authors pocket the rest - or do they?

Entrepreneurs must keep Uncle Sam in mind, too - especially as no one else will do it for them. "I didn't receive anything from Amazon in regard to tax records for filing," says one successful Kickstarter project creator. "I would assume it's taxable - it's certainly income, no question."

Like any income source, Kickstarter funds may be taxable. And since many Kickstarter projects are simply pre-order engines for unfinished products, those funds may be considered pre-sales and incur an additional sales tax.

There are other questions that you have to think about as well. If you're not an incorporated entity but are instead an informal team of artists or developers, which member of the team is financially responsible - and liable for the taxes? And don't assume that you can simply claim that the funds you raise are donations - unless, of course, your organization is a registered 501(c)(3) non-profit.

Every project is different, so the surest way to deter to determine how these concerns apply to your specific situation is to consult your accountant or lawyer.

But once a project is launched, it is primarily the responsibility of its creator to get the word out. Press releases, Facebook, Twitter and word of mouth are invaluable. The best promotion may be the creator's own reputation. "It really helps for Kickstarter to be the last chapter rather than the first chapter in people knowing you," says Scott.

The ability for a known company to raise funds via crowdsourcing was demonstrated in February by Tim Schafer, a video game developer with decades of experience. When Schafer decided to bypass the traditional route of acquiring startup capital from a publisher for his next game, his company, Double Fine, turned to Kickstarter for funding. It received more than eight times the hoped-for $400,000.

The big-name projects don't necessarily intercept dollars that could be pledged elsewhere. Of Double Fine's 87,142 backers, 71% were first-time Kickstarter users and 15% pledged an additional $877,000 to 1,266 other projects. Online newscaster Checkpoint reported that in the two months before Double Fine's adventure, 15 games were funded on Kickstarter for a total of $169,000; in the two months since Double Fine began asking for Kickstarter funding, $4,276,391 was poured into 34 "indie" games, not counting those from storied developers such as Interplay founder Brian Fargo, who is creating a sequel to the Apple II game Wasteland.

There are other ways that project owners can get attention. They can now connect their Facebook accounts to Kickstarter, to be notified when their friends back projects, improving their discoverability. And Brian Fargo has created an unofficial " Kicking It Forward" program, in which project creators can opt to pledge 5% of profits derived from successfully crowdfunded projects back into Kickstarter.

The future of crowdsourcing

Kickstarter requires project creators to be permanent US residents and at least 18 years of age with a Social Security Number (or EIN), a US bank account, US address, US state-issued ID (driver's licence) and major U.S. credit or debit card. Because of this, Andrew Russell, a software developer in Australia, used RocketHub to fund a tool to ease porting games from XNA (Microsoft's game development framework) to other environments, such as iOS. "It's still impractical for someone outside the United States to use Kickstarter as a creator," Russell says of why he chose RocketHub.

Russell's open source project successfully received more than the requested funding, but he still sees ways for the crowdfunding model to grow. "One idea that I think would help is the ability to set multiple goal thresholds," he suggests.

Many Kickstarter projects unofficially use this model; project owners will offer extra benefits for more funding, such as adding more platforms and languages if more money is raised.

Crowdfunding will soon be an option for even more entrepreneurs. The JOBS Act, signed by President Obama on April 5, will turn crowdfunding into a source of capital for small businesses.

Whether you're a small business owner, an entrepreneur or an independent artist, Kickstarter and its competitors have become a valuable and valid way for anyone with an idea with uncertain marketability to test the waters. Says Scott, "If you think of a project where $1,000 makes a difference then Kickstarter is a no-brainer."